Question

Microsoft Dynamics GP Write off an Uncollectible accounts receivable Under the allowance method, the write off of a specific accounts receivable:

1. Decreases net income and decreases accounts receivable.

2. Decreases net income and decreases working capital.

3. Affects neither net income nor accounts receivable.

4. Affects neither net income nor working capital.

5. Increases bad debit expense and increases the allowance for doubtful accounts.

Answer 1

--Under Allowance method, when an specific account is written of:
>Allowance account is debited, which decreases the Allowance account balance.
>Accounts receivables is credited which decreases the Account receivables balance.

--However, since Allowance account is a contra asset account, the writing off an account DOESNOT change Net Accounts receivables. Take the following data for example. Assume the specific accounts written off of $ 10,000

Before Writing Off		After Writing Off
Accounts receivables	$100,000	Accounts receivables [100000 - 10000]	$90,000
Less: Allowance for doubtful account	$30,000	Less: Allowance for doubtful account [30000 - 10000]	$20,000
Accounts receivables, net	$70,000	Accounts receivables, net	$70,000

--As you can seem the "Accounts receivables, net" balance is $ 70,000 Before and after writing off $ 10,000 accounts receivables.

--This means that:
>Net Income is not affected as none of the account affected through journal entry form part of Income Statement.
>Total current asset does not change
>Total Current liabilities does not change.
>Working capital does not change because Working capital = Current assets - Current Liabilities.

--Hence, correct Answer: Option #4. Affects neither net income nor working capital.